What Ford's Chief Financial Officer Said About Its Surprise Loss in Asia

Ford lost groundto local Chinesecompetitors in the first half of 2016. It plans to fight back with several new models, including a special version of this China-only Ford Taurus sedan. Image source: Ford Motor Company.

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Over the last few years, Asia -- and China in particular -- has been a great story for Ford Motor Company (NYSE: F). But that story took a surprising and unwelcome turn in the second quarter, when the Blue Oval's Asia Pacific business unit, which had been solidly profitable, swung to a surprise loss.

Ford's Asia Pacific unit posted an $8 million pre-tax loss int the second quarter, down from a $194 million profit a year ago. This was a surprise: Ford Asia Pacific had started the year off strong with a $220 million first-quarter profit, and it looked like all was well.

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But as CFO Bob Shanks explained during Ford's earnings call, there were several factors that weighed on Ford's second-quarter results in Asia:

"Asia Pacific is an interesting story. We saw a decline in wholesales. Some of that was expected, because we did have a planned eight-week shutdown of our Chongqing number-one assembly plant" (for renovations).

"But frankly, there were performance issues at Ford as well," Shanks said.

Source: Ford Motor Company.

"Revenue was up 17%. We did see a decline in market share. That was China. And if you look at the margins, obviously we were just below breakeven in margins and pre-tax results," Shanks said.

But the real issue was what happened to Ford's market share in China: It fell. Shanks turned to this slide to explain.

Source: Ford Motor Company.

"If you look at the far left, last year we had 5.3% [market share] in China. We're down about 0.9 points, and you can see the factors that drove that."

Shanks explained that about half of the year-over-year decline in Ford's market share was "external," meaning that it was related to the mix of vehicles that consumers in China chose to buy. Simply put, sales of passenger vehicles were stronger than sales of commercial vehicles like vans and trucks -- and Ford has significant investments in both sides of the market.

To make matters worse, the part of China's commercial vehicle market that did show some strength during the period was a segment in which Ford doesn't offer a product.

As Shanks put it, "The segmentation issue is that within commercial vehicles [industrywide market share] was down. But it was actually up in the very low margin mini-commercial segment, which we don't participate in" [emphasis added]. "If you think about the part we participate in, [the market-share decline] was even lower."

Not all of the problem was due to market shifts. Some of it was due to Ford's performance against increasingly tough local competition. "On performance, we were off 0.4 points," Shanks said. "That was largely around weakness in the C segment [small cars] and the small utilities where we're seeing a lot of competition from the domestics [Chinese automakers]. They are really coming up strongly and with really improved products."

Shanks said that the competitive issues began to show up in March, and that Ford's Asia Pacific management team was able to take action quickly, adjusting pricing and inventories to more competitive levels. "As you can see [on the slide above], looking at the share in April, May and June, we started to get back on track," he said.

Ford's CEOthinks things will improve -- but will it match last year's result?

Shanks and his boss, CEO Mark Fields, were both optimistic that the Asia Pacific unit, and China in particular, will perform better in the second half of 2016.

Fields pointed out that several new or refreshed models are set to debut in China in the second half, including the revamped versions of Ford's Kuga and Mondeo (twins to the U.S.-market Escape and Fusion), and a version of the big China-only Ford Taurus sedan with a small four-cylinder engine that will allow the car to qualify for a special tax break.

Fields also said that Ford has improved its product mix, selling more of its more-profitable larger cars and SUVs in China. It's taking steps to increase local supplies of the hot-selling Edge and Explorer SUVs as the year goes on. And at the lower end of the market, he said, it has revamped its least-expensive models to reduce costs and allow them to be profitably sold at more competitive prices.

Ford Asia Pacific earned $765 million before taxes in 2015; through the first half of 2016, it has earned just $212 million. Fields said that he expects the region to do well as the year goes on, particularly in the fourth quarter. But it will have to really shine to match or beat last year's profit total.

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